Investors who think the market is rational should check out the action after hours last night after Apple (AAPL) delivered its earnings report. The company beat across the board, gave solid guidance... and shares sold off some ~$15 a share before saner heads came into the market and bid the stock back up to its Monday's closing price.
Now that investors have had time to digest the details of the earnings report and subsequent conference call, they should realize the stock still offers an attractive valuation and has the momentum to go higher by year-end. My recent call for $550 a share by the end of the year is probably going to prove conservative in hindsight. Let's take a look at the positives from Apple's earnings report, the immediate reaction by the analyst community and what events are going to drive the stock higher by year-end.
Positives from Earnings Report:
- The company reported earnings of $8.26 a share, 33 cents a share above consensus.
- Revenues came in at ~$37.5B, more than $600M over expectations.
- In the quarter Apple sold 33.8M iPhones, 14.1M iPads, 4.6M Macs.
- The company provided next quarter guidance calling for revenues to come in within the range of $55B to $58B versus the current $55.65B consensus.
- Gross margin for the quarter was 37% at the high end of a guidance range of 36% to 37%. Next quarter gross margin is expected to be in a range of 36.5% to 37.5%.
Obviously these kinds of results were going to generate positive analyst commentary. As expected a slew of analyst firms upgraded their ratings and/or the price targets on Apple in the immediate aftermath of the company's earnings results.
- BMO Capital upped its price target to $600 a share from $508 a share previously.
- Baird upgraded the shares from "Neutral" to "Outperform".
- Lazard Capital lifted its price target to $610 a share from $570 on AAPL.
- Susquehanna reiterated its "Positive" rating and $625 a share price target after this earnings beat.
- Even Jim Cramer gave the stock a big "shout out" on his Mad Money show last night.
- Finally, JP Morgan is telling clients the stock is ready to "break out".
Going forward, I believe there are three additional catalysts that will drive the stock forward through the end of the year.
Beginning of Product Cycle:
Apple only got three weeks of sales from its new iPhones in the quarter as they were just launched on September 10th. In the new quarter, the company will benefit from a full three months of 5s & 5c sales right during the holiday season. In addition, the launch of new iPads will address one of the only weak points of Apple's earnings report that showed iPad revenues declining 13% Y/Y in the quarter.
That China Mobile Deal:
Although sales in China increased 6% in the quarter which was an improvement from the 14% decline last quarter; Apple still has just a ~5% market share in the Middle Kingdom. A deal with China Mobile (CHL) that has long been speculated and would benefit both companies should be concluded by year-end. This will give Apple over 700 million potential new customers and should boost sales in China exponentially. The recent signing of Japanese carrier NTT DoCoMo (DCM) and its 60 million subscribers was a key driver of Apple's 41% increase in revenue from Japan this quarter in way of comparison.
Buybacks & Dividends:
The amount of money the company is returning to shareholders is staggering and should continue to be a favorable tailwind for further capital appreciation. The company spent almost $8B in dividends & buybacks during the recently completed quarter. To put that in perspective, this is more than American Express (AXP), which is a ~$90B company by market capitalization, will make in profits in FY2014.
Tim Cook also alluded to new capital allocation moves that will be announced early in 2014. Given the pressure Carl Icahn is exerting towards this end and the company's huge cash hoard, I would expect some significant increases in buybacks and possibly dividend payouts in the first half of 2014.
In the coming weeks, expect to see more upward revisions by analysts on Apple. Earnings estimates will be taken up and price targets will continue to rise. Combined with the other positive catalysts listed above, Apple shareholders can expect a very merry end to 2013.